Leading 'Rescue' Plan for Lehman to 'Split It Up'

Discussion in 'Wall St. News' started by ByLoSellHi, Sep 14, 2008.

  1. Leading Plan for Rescue Would Split Up Lehman


    Published: September 13, 2008

    The fate of Lehman Brothers, the beleaguered investment bank, hung in the balance on Saturday evening as Federal Reserve officials and the leaders of major financial institutions concluded two days of emergency meetings with no agreement on a plan to rescue the stricken bank.

    Several possible plans emerged from the talks, held at the Federal Reserve Bank of New York and led by Timothy R. Geithner, the president of the New York Fed, and Treasury Secretary Henry M. Paulson Jr.

    The leading proposal would divide Lehman into two entities, a “good bank” and a “bad bank.” Barclays of Britain would buy the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.

    Under that plan, the Wall Street banks would agree to provide up to $30 billion of support to absorb the losses of the bad bank. That is roughly the same amount of money that the government agreed to commit to support JPMorgan Chase’s emergency takeover of Bear Stearns in March.

    The assets of the bad bank would be sold over time as the market for mortgage-related assets recovers and buyers emerge. If the assets appreciate, the bank consortium would share in the profits. But they would also be responsible for any losses.

    None of the banks involved, however, have committed to any rescue plan, and talks could still fall apart. The talks will take on even greater urgency on Sunday as government officials push for a deal before the Asian markets open on Monday morning.

    The banks could also pursue other options. One that was discussed on Saturday would have major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months, according to several people briefed on the discussions. That would buy Lehman time to sell those assets in an orderly way and avoid a fire sale that could depress prices of similar assets held by other banks.

    The overarching goal was to prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world. Of deep concern is what impact a Lehman failure would have on other securities firms, insurance companies and banks, notably Merrill Lynch and the American International Group, both of which have come under mounting pressure in the markets.

    A.I.G., one of the world’s largest insurers, may need to raise $30 billion to $40 billion to avoid a severe downgrade to its credit rating, according to people briefed on the situation. An A.I.G. spokesman, Nicholas J. Ashooh, called that estimate speculative and declined to comment further.

    Some considered the weekend talks as high-stakes brinksmanship.

    Both Barclays and Bank of America expressed interest in buying Lehman and were negotiating hard, initially insisting that the government provide financial support. But federal officials were adamant that no public money be used — a big point of contention because many of the top Wall Street executives believe that their banks, which have each written down tens of billions of dollars in assets, do not have the capacity to lead the rescue on their own.

    The prospects of a deal involving Bank of America appeared to fade as talks progressed Saturday and it became clear that the government would not stray from its position.

    Jenny Anderson, Michael J. de la Merced, Louise Story and Landon Thomas Jr. contributed reporting.
  2. Looks like the govt are playing hardball with the street

    BSC bailout appears to be a one off and since then the various IB's have had the opportunity to sort them selves out ie raise additional capital, access to the discount window etc.

    LEH have had ample opportunity to recapitalise and it would appear they didnt appreciate the gravity of the situation or maybe thought that the govt [taxpayer] would provide a back stop and did not lock anything up.

    If LEH goes into an orderly liquidation [most likely scenario at this stage] it would strongly signal to the other IB's to sort them selves out.

    IMO an orderly liquidation would not be the end of the world. I stand to be corrected on this though.

    Asian markets open up in 16 hours....